Are We Too Young to Retire?

[cj30000]

Life Situation:  UK based couple aged 36 and 38 with no kids. The UK taxes individuals rather than households so have provided separate income and tax figures below.
 
Gross Salary: £170,000 p.a. me, £150,000 p.a. her. Includes bonuses and employer pension contributions. All earned through single employers and taxed at source through PAYE (Pay as You Earn for non-British readers)
 
Pre-tax deductions: £12,500 me and £10,000 her, pension contributions. We just contribute the minimum to get our employer match as we think we are overweight pensions in our asset allocation at the moment.
 
Other Income: Nothing significant
 
Taxes: £64,000 me, £55,000 her
 
Current Expenses:  £30,000 p.a. (no mortgage, holidays £9,000 (we get 7 weeks off work per year!), utilities £2,000, transportation £1,000, gifts £1,000, groceries £4,500, council tax £2,500, clothing £500, car maintenance £1,200, £8,000 extras incl eating out, days out, new tech etc)
 
Expected RE Expenses: £45,000 p.a. (we would want to travel more than we do, we also have a number of older items that we haven’t upgraded including our car, some clothing plus we need to be better on house maintenance)
 
Assets: £2.8m (£0.5m home, £1m pension, can’t be accessed until age 58, £0.7m taxable investments, £0.6m ISA, tax free investments, pensions and investments are 90% in passive global equities)
We do have a car but it is 15 years old and has minimal sale value
 
Liabilities: None
 
Specific Questions:

Hi all, we are a couple living in London in the UK and we are trying to work out what to do next. We both work in finance and have done for the last 15 years so we’ve started to earn reasonable salaries (for the UK at least!) over the last few years and we have managed to accumulate a pretty good nest egg by just not increasing our expenses when our salaries went up. We’ve also never spent a bonus and were pretty good at using the tax breaks available here to put money from our gross income into our pensions. We were also very fortunate to inherit around £380k when my great aunt died a couple of years ago. Originally we were planning to retire early once we had enough cash but we are struggling with a few questions that hopefully you can help us with:

• Although our total assets are good and would indicate a healthy withdrawal rate most of them are tied up in pensions which we can’t access for 20 years. This access date is set at 10 years below the state pension so if the government raises the state pension age this time period could extend further. Therefore, we only have around £1.2m to cover the next 20 years. We aren’t quite sure how to decide an appropriate withdrawal rate for this. We’ve looked at ERN and CFIRESIM but since they are based on US stocks we feel uncomfortable basing our decision on this and feel like we need to be more prudent. Any datasets we can use that have a long history of global stock data? Are we being overly prudent by even worrying about the difference?
• We work pretty long hours at the moment and we are worried that when we stop work our expenses will go up significantly. If you have retired, did your expenses go up when you started having the time to do more with your free time?
• We are worried about sequence of returns risk so one of us may continue working for a few years with the other one taking all of the home tasks, how long should we do this for to mitigate the risk?
• We are worried about having a purpose when we retire. We have enough to fill the next few years with some home renovations, travel, decluttering, moving to a new area but we aren’t sure at that point. We think we may get bored and then want to return to work. We are pretty stressed by work at the moment but both of us like being stretched, having new challenges and to a certain extent the prestige that comes from progressing through the grades in financial services. If we left would we be able to fill this gap and if not, would we be able to return? Does it even matter if we don’t?!
  
• We are very good at not spending money – we think we may need to learn to spend more given our assets and the fact that we don’t plan on drawing down until both of us have quit work in a few years. Do you agree and if so any tips on reversing a 15 year trend of really questioning every expense without feeling out of control?

Thanks very much in advance for all your help!

[Financial.Velociraptor]

Expected RE Expenses: £45,000 p.a.

Assets: £2.8m (£0.5m home, £1m pension, can’t be accessed until age 58, £0.7m taxable investments, £0.6m ISA, tax free investments, pensions and investments are 90% in passive global equities)
We do have a car but it is 15 years old and has minimal sale value

Ok, so is this 0.7M and 0.6M available to be spent now without penalty?  That would be 1.3M (pounds of course).  Four % rule gives you 52k/yr as Safe Withdrawal Rate (SWR).  You expect 45k in re spending, so would have 7k in cushion.  You are ready.  If that 0.6M "ISA" is restricted by age, you cannot. 

[Laura33]

First, congratulations!!

Second, make sure you don't count home equity towards the amounts available for retirement (don't think you have, but just a reminder).

Third:  assuming that your pension will cover your needs after you hit official retirement age, you're good.  Your concern is "only" having $1.2M to cover a $45K/yr annual spend for 20 years.  Even if you don't earn another penny on that money -- if that entire $1.2M was in a bank account earning zero interest -- you'd be able to withdraw $60K/yr for the next 20 years before the account hit zero.  If your spending is less than that, or the money grows at all, you can easily stretch it out for many additional years (your planned $45K/yr will last more than 25 years, assuming no interest/earnings). 

Added layer of protection:  even your $45K RE expenses is a 50% upcharge over what you've actually been spending for a number of years.  That gives you a rather ridiculous amount of room to cut back if various economic or life events require you to do so.

IMO, you are in great shape to do whatever you want, whenever you want it.  You are right to be concerned about SORR, but you manage that by putting at least some of that $1.2M into bonds or HYSA (that is, investments that target "not losing money" instead of those that target "maximizing returns").

But the thing that strikes me is that all of the above is self-evident to someone like you.  You guys work in finance.  You can do math.  I mean, an 8-year-old can tell you that $1.2M divided by $45K/yr is 26.67 years, which takes you well beyond full retirement age, so I know that is equally obvious to you.  I was an English major, and I understand the math well enough to see that you could stick all of that money in a bank and be 100% covered and 100% safe from SORR, for years longer than your planned 20-year timeframe; again, you work in finance, so that option has to be even more apparent to someone with your background. 

So:  given that the concerns you raised have fairly obvious solutions to someone with your background, what is the real concern driving you?  What is actually holding you back from pulling the plug? 

(Hint:  I'd start with your 4th question)

[Howdotheyriseup?]

Congratulations on where you've got to. I haven't retired but have been dealing with this for workaholic parents... I think it was really helpful to go part time and for them to find activities outside of work which gave them fulfilment.

I would suggest both of you reducing your hours will be better than one stopping and one continuing. You can find fun things to do together/go on trips together. Or get on top of those home renovations together. Better from a tax perspective too I would think. That will also give you a chance to see how your spending reacts to having more free time.

[bownyboy]

The numbers work fine. You could both quit tomorrow and enjoy life.

However, it seems that this is more of a pshycological question of 'what next...'? after working long hours for so long, you haven't really had time to think about what you are retiring to?

So could you start to work less hours or go part time? Could you leave and go contracting instead? Or maybe take 12 months sabbatical and travel the world and see how you feel after that?

Basically you're in a great shape and have many options to choose from!

For me I went from working permentant long hours and burnt out > contracting full time > contracting full time but with lots of time off > contracting part time > FIRE'd!

That process gave me a taster of what more free time would be like. It also coincided with the first lockdown which meant I never commuted again, so gained 2-3 hours a day.

In terms of spending ours is about the same as when we were working. The differences are we can choose to travel off peak and grab deals; we cook at home more as not so much in a rush. I probably spend more on alcohol (oops!)

[Kwill]

Good luck with all of this! I noticed question 2 has you worrying that you might spend too much and question 5 has you worrying that you might not spend enough. I hope you can enjoy the time whatever you do.

I'm not FIREd but am on a long break at the moment. With my own situation, I had a big list of things I wanted to do at the beginning--trips to take and people to visit. I spent money on domestic and international travel plus a laptop since I only had a desktop PC plus a work laptop. I'm starting to get through my wish list of places and people to see, though I could spend at least another six months on it. I could imagine your spending in the first year or two being very different from while you were working and then settling down to something more predictable as you find what you want to be busy with in retirement. You might think of budgeting specifically for those big things--the car and the the travel and the relocation you mentioned--and then figuring out what you want your typical annual budget to be separately from those.

[waltworks]

Financially, you're good.

Do you have a plan for something to do other than "not work"?

I FIRED a while back, 2020 or so, and what I realized is that there's pretty much nobody in their early 40s (let alone late 30s like you guys) to hang out with during the day. I spent a lot of time riding my mountain bike/skiing alone and too much time on screens (which I still do to some extent, darn it). I only have so much in common with your typical Boomer retiree who I'd see at the library so the pool of friends was basically zero. Likewise community college 19 year olds with time off during the day. Super lonely.

I ended up restarting my small business part time and taking up substitute teaching because I realized I'm much happier when I have some level of responsibility to other people and a set schedule to stick to most of the time.

So anyway, make sure to heed the cliche - you want to retire TO something, not just away from work.

-W

[Jade]

Well done on the position you've got yourselves to. It does seem like more of a psychological question rather than financial given your numbers.

I'd second the recommendations to taper down your work over time to get used to working less, if possible. I know some industries are less flexible like that though and finance may be one of those. Is freelancing / consulting an option? That's how things have happened for me and my partner and though I'm still working (very) part time at 48, he's retired (53) and both of us are already very used to occupying ourselves each day. It's definitely not that cliff edge you hear about that some people experience, as they retire.

The other I guess is leaving, keeping yourselves busy with your plans for a few years, get rejuvenated and then see how you feel and pick up (or not) work then if you'd like to...

I think though it can be great to get to the financial milestones like FIRE, it can take quite a pivot to change gear when you get to where you've been aiming at for years.

[SeattleCPA]

Four % rule gives you 52k/yr as Safe Withdrawal Rate (SWR).  You expect 45k in re spending, so would have 7k in cushion.  You are ready.  If that 0.6M "ISA" is restricted by age, you cannot.

Can you say 4% "rule" works in UK?

I don't know. But the math would have worked differently for other countries.

Source: https://www.financialplanningassociation.org/sites/default/files/2021-10/DEC10%20JFP%20Pfau%20PDF.pdf

[NorthernIkigai]

Four % rule gives you 52k/yr as Safe Withdrawal Rate (SWR).  You expect 45k in re spending, so would have 7k in cushion.  You are ready.  If that 0.6M "ISA" is restricted by age, you cannot.

Can you say 4% "rule" works in UK?

I don't know. But the math would have worked differently for other countries.

Source: https://www.financialplanningassociation.org/sites/default/files/2021-10/DEC10%20JFP%20Pfau%20PDF.pdf

Nowadays, with investing being much easier and cheaper than it used to be, there is no reason to only invest in or even to focus on your home market. Aside from tax implications (which you should be aware of but which usually aren't a huge deal) and currency changes (which can go either way, so trying to avoid them costs money and is trying to outsmart the market), investing anywhere in the developed world is pretty much the same. Back when I started investing 15+ years ago, the fees we paid here in Europe were still much higher than those paid by US investors, but they have come down a lot since.

[waltworks]

If there is a large land war fought in your home country, you indeed may need to rethink your FIRE plans.

-W

[PhilB]

As others have said, the maths is easy in your case- my own suggestion would probably be £25k pa in an indexed gilt ladder and £25k pa drawdown from the rest of your investments to give you £50k pa tax free.
The real question though is what does your ideal lifestyle look like? Only then can you start to see whether you can fund it from your assets.

[cj30000]

Thanks everyone for your really helpful perspectives and insights.

Many have suggested that we start to take our foot off the gas slowly which really resonates. I’m going to start by asking my employer to move to four days a week. There are a good number of people at my firm already doing this so I think I have a good chance of getting it through. I have a history of being too much of a people pleaser at work, keeping my head down and doing as I’m told. This is an urge I have to fight if I’m going to start getting more of my own time.

We do have a globally diversified portfolio. Most of our workplace pensions are invested 50:50 UK/Global which gives us too much focus on the UK. We try to reduce this focus by investing global ex UK outside of our pensions. All of our investments are in low cost index funds.

Thanks again everyone for your help and guidance.

[cerat0n1a]

• We work pretty long hours at the moment and we are worried that when we stop work our expenses will go up significantly. If you have retired, did your expenses go up when you started having the time to do more with your free time?

My experience has been the opposite, tbh (FIREd in the UK in my forties). No spend on commute, less spend on lunch, able to do day trips/ holidays at less busy times, more time to do things myself rather than paying money to save time. I think your finances are such that you'd be able to live a pretty comfortable life in any case.

We are worried about having a purpose when we retire. We have enough to fill the next few years with some home renovations, travel, decluttering, moving to a new area but we aren’t sure at that point. We think we may get bored and then want to return to work. We are pretty stressed by work at the moment but both of us like being stretched, having new challenges and to a certain extent the prestige that comes from progressing through the grades in financial services. If we left would we be able to fill this gap and if not, would we be able to return? Does it even matter if we don’t?!

I think this is the key point - you need something to retire to, as well as retire from, as others have said. I have a pretty much endless list of things I want to do, but I appreciate that's not the same for everyone. Certainly the status thing is worth thinking about - it can be quite difficult to explain to people why you're 'retired' at such an early age. I think there's maybe less of a problem finding people your own age to do stuff with during the week - 3 or 4 day weeks and the like are a bit more common here than in the US, particularly for women.

Your house seems surprisingly cheap for London?

[Jacinle]

Congrats to a big pot as your age!

Numbers wise I think you are good.  Your question 'are we too young to retire?'  It's more what you are retiring into

Put in buckets
38 - 58 - 1.3m (0.7m taxable, 0.6m ISA tax free - @4% = 52k
58 - 68 - 'additional' 1m - @4% = +40k
68 onwards - addition of state pension = +~10k

For the first 2 decades, your risk is somehow mitigate by buffer in spending, 7k diff,  your 'old required maintanence' items could be spread across and But perhaps by increasing the emergency cash pot to 2 years (or more) expense to survive an unexpected market event, or else you got too much at the end, so to speak

Cheers

[Bee21]

You can retire now, take a couple of years to decompress and do all the things you want and then go back to work if you feel bored/worried/ restless. In your situation early retirement doesn't have to be a final solution.

[Jay Ritchie]

hi

Wondered about how your thoughts on this have progressed?